Fed Halts Sales Of Toxic AIG Sludge Upon Realization Any Balance Sheet Unwind Crashes The Market

Tyler Durden's picture

Three weeks ago, when discussing the failed (yes, failed) Maiden Lane 2 auction by the New York Fed, we said: 'Something quite disturbing happened during today's latest attempt by the Fed to sell $3.8 billion in face amount of Maiden Lane 2 assets: it had a busted dutch auction. In fact, the auction was so massively busted, the New York Fed managed to sell only half of the bonds for sale, or $1.898 billion in 36 Cusips of the total 73 Cusips offered for sale." Subsequently we noted the sudden radiosilence from the Fed on this issue on Twitter. To be sure, every MBS trader and the kitchen sink promptly complained that the Fed was saturating the market with toxic AIG garbage, which prompted us to declare that: "unless someone opens up a release valve, we are about to see a massive
regurgitation and even more massive repricing of credit risk, first in
IG, then in HY and ABX/CMBX, and lastly, and most massively, in
equities, which continue to exist in their own world and which are now
totally disconnected with HY, which they used to track so very closely." We just got the release valve: from Bloomberg: "The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. "Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public," Jack Gutt, a New York Fed spokesman said in an e-mail." Uh, what prevailing market conditions: a Nasdaq which has ripped over 100 points in one week (granted on no volume and on unprecedented market manipulation but so what). Regardless, this is a huge slap in the face for the Fed, which has just proven that even in a surging market it can not unwind an amount from its book that is less than 1% of its total asset holdings without actually crashing the market.

We certainly can not wait for BTIG's spin on this news tomorrow.

In the meantime, we remind readers of what we predicted, accurately, on June 9:

If dealers and funds are unable to handle a mere $31 billion MBS portfolio disposition, and its weekly sale (think of its as a reverse repo) is starting to cause massive ripples in the bond market, just what will happen when dealers are forced to hold back the tens of billions in weekly bond auctions they freely flip back to the Fed now. In other words, is the credit market on the verge of a oversaturation implosion (hence the title)?

Good luck with that end of QE2 boys. You will need it.

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ghostfaceinvestah's picture

Nice timing, given that the ABX jumped due to the BAC settlement.

Rider's picture

Fed's balance sheet is unwindable, as Tyler said; GL trying to sell that g-bage.

max2205's picture

Crash what market? The 30 yr -5% this week?

Crash the unlisted MBS market which I can see?

unununium's picture

You mean UN-unwindable.

Does anyone know, regarding QE lite, whether the amount reinvested is the face value of maturing securities, or what the fed actually received?


SwingForce's picture

These are uncollectible receivables- these mortgages have already been paid off thru TARP etc, The Top5 banks have stopped foreclosures, why? They have already been paid for them! Take the property back, sell it, and book the loss (finally!) = INSOLVENT

Come on bitchez, its not so hard to figure out, there's more to life than PMs...

unununium's picture

Bingo.  But why take the properties now?  Wait until values recover.

But that is the best way I've found to explain the ripoff to Joe 6pack.

 - Banks are not being paid back

 - Banks are being made whole by the government

 - Banks ALSO keep the note and get the property when foreclosed on

DaveyJones's picture

Where can I get my clients this kind of criminal sentence

Gubbmint Cheese's picture

Ghost! Good to see you again!

ghostfaceinvestah's picture

Another positive is the Fed will keep all the coupons which they can then send to the Treasury as "profit".


metastar's picture

Since when was the FEDup ever in charge of achieving value for the public? These SOBs are in it for themselves and the banks who own them!

Rynak's picture

The more disturbing thing is, that they are now outrightly saying, that those assets are worth shit on the open market, even though it is priced a little bit different in their books.

ghostfaceinvestah's picture

They were also driving down the mark-to-market value of the crap still sitting on the banks books.  Doh!

AIG was getting their revenge for pressing the issue and making a bid for those things.

Rynak's picture

Now, come on. Let's please keep reason out of this.

knukles's picture

To reason or not to reason...
The Fed is Not Exempt form Wall Street Skullfuckings.
The Fed got their own ass into the sling.
Nobody on the Street, well maybe a well known asset manager or two, helped them buy the crap. 
They didn't go through a broker.
The Fed's own rootin' tootin' top notch market experts bouhgt the stuff.
Came out of the Holy Jesus H Fucking Christ WTF is This Shit Books of the Should Have Been Mothballed to be Used as a Fuckushittnme Cork company that should just been let fucking die.
Since no Wall Street entity show feality in the purchase, and BTfuckingW by Wall Street's rule book, you shoulda damned well bought the stuff through the Street and this wouldn't have happened.
Liar liar pants on fire.
So, if you gets fucked because you bought and own a warm smelly pile, we ain't gonna help you un-own it now, are we?
Think we're in this business to loose money, asshole?

Because it's worth.......


Else we'd a bid you down, hard for it, and told you what a great fucking job we did rescuing you.... but we didn't.
Did we?

So, taxpayer, whaddya think about that now?

PS... This Shit was Bought on Timmah's Watch

knukles's picture

And I can tell ya how this'll end.

Some poor mid level clerk's gonna get fired from the Fed because somebody responsible for buying this shit'll say that he pulled the wrong cusips off of Bloomberg to get the information to value the crap....


Cdad's picture

it can not unwind an amount from its book that is less than 1% of its total asset holdings without actually crashing the market.

Good...so continue the sale of the assets and crash the market.  We all know that this is the necessary precondition of QE3, money printing being the only thing holding up the stock market.

So let's get back on it and dump the toxic sludge.  What, are we saving it for rainy days? 

What a preposterous set of circumstances, from end to end, coast to coast, asset class to asset class, from perpetrator to perpetrator.


Rynak's picture

They can't do it in a too obvious way - need to not kick out the supports of willful suspense of disbelief.

citta vritti's picture

just so as to cause maximum pain for everyone not prepared, even if in on it or forewarned, so the salve can be called healing “O Balm a", no longer o-bomb-ya.

Cdad's picture

They can't do what in an obvious way?  Sell sludge?  Buy sludge?  Who is lost on the point that it is sludge?

Seriously, the sludge needs to be sold at a loss.  It doesn't matter the time frame or market conditions.  It would have been better had the sludge been sold at a loss while the sludge was in the banks, but Ben Bernanke thought he had a better idea...which is namely to pass the loss onto the taxpayers.

However, the problem with this being obvious is that it is obvious.  This was the most important ZeroHedge story of the day and I, for one, want the sludge dumped and the loss posted.  

Who the fuck does anyone think they are fooling with this nonsense?

Founders Keeper's picture

[So let's get back on it and dump the toxic sludge.  What, are we saving it for rainy days?]---Cdad

Hi Cdad.

What are we saving it for? IMO, no one wants to be the one blamed for tipping the world into the greatest economic collapse in the history of mankind.

Not the Fed. Not the Obama administration. Not the Democrats or the Republicans. Not the FDIC. Not China. Not Germany, ECB, or IMF. Not Bill Gross. Not OPEC. And not the ratings agencies.

Regardless. A collapse on some order of magnitude is imminent. Just a matter of weeks or months. No one wants to get caught holding the murder weapon when the lights go on.


ebworthen's picture


Halted sales right at the end of QE2 and before the "Independence Day" holiday.

King George III is laughing somewhere right about now...


Sudden Debt's picture

I tought they where suposed to be such a good deal?


could they have been wrong?...?


tedsmojo's picture

Long chaos until we drill to the center of the earth...

emsolý's picture

Everybody's saving / pre-committing / earmarking their funds for next year's IPO of The Facebook.

CrashisOptimistic's picture

This is a huge story and explains the sharp drop in high yield bonds last week, and their subsequent recovery.

The subtext is there is no escape from oil's crushing grip.  The Fed will not be allowed to unwind.  It's all downhill from here.

Franken_Stein's picture


So the Fed is stuck with RMBS and CDOs forever !


And this is where Ron Paul comes in handy.


If he abolishes the Fed, all the Fed balance sheet will be cleared and thus the Fed will have to suffer massive writedowns in the 2 minutes before it ceases to exist.

But that's irrelevant by that time anyway.


If the Fed isn't abolished and it clears its blance sheet, what would happen ?

Can you declare an MBS, that the Fed bought from AIG with newly created fiat money, nonexistant ?

A 100% loss and subsequent discardation ?


If so, then you have a Fed debt/liability (-) on the Fed balance sheet where there is no corresponding CB money (+) anymore or any security/asset that the Fed bought with it.


So all of that irredeemable CB fiat debt has to be canceled too.

It's just a simple mathematical operation.

Just some trillions.

A paper loss is turned into a REAL loss.

At a certain point in time this loss will have to be realized anyway.


They just hoped that the loss being realised at he Fed will be less painful than when the shit had exploded while still on AIG's balance sheet.


Do we not live in a crazy world, where balance sheets and some stupid numbers representing "money" seem to matter more than people and their fate ?


Franken_Stein's picture


I mean how can a bank with infinite paper money creation and corresponding debt creation ever suffer losses ? It can't.

As soon as you discard debt, you can immediately spawn new debt.


Rynak's picture

The problem is that you cannot just simply abolish a currency - only trade it for a new currency. You COULD abolish all debt held by banks, by just nuking the banks..... but then, what happens to the stocks? And the lenders to those banks?

All this globalized "everything connects to everything" is one big pile of steaming shit! It is a recipe for disaster, because economic nuclear explosions can no longer be contained. To fix this stuff at all, you need magic... you would - with the iron fist of the state, have to give a fuck about financial rules, and just DECLARE wealth. But what would happen, if in the current interconnected world, someone would dare to do this?

Problem is, someone will have to start doing just that, sooner or later.

knukles's picture

Investment Banking 101

Old Fed creates New Fed.
New Fed leaves old shit behind in Old Fed.
Difference is recorded on the books as "Goodwill" and amortized over the remaining life of the Feds.
Remaining life is defines as the longer of the first recorded manned landing on Alpha Centauri or One Bazillion years.
Long live the Republic.

(Flyovers, national anthem, balloons, confetti)

What's the problem?

Rynak's picture

The only problem is that it fixed nothing, and just kicked the can.

I can see the (non-)reason in the insanity though: Compensate until everything collapses, but by then you won't be there anymore. Basically: Let those living longer than me, eat scorched eath.

Problem is: I will still be alive, when it all comes crashing down - the only question left is if they will find me, and what percentage of civilization will still be alive to be looking for me.

Pure egomania.

jm's picture

So I assume a loss severity of 0.57 of par.  I can buy subprime at 0.34.

Talk me out of buying this stuff.

Rynak's picture

Please explain? I'm not very familiar with established economic terms. I.e., what you you mean with "loss severity of 0.57 of par"?

jm's picture

Let's keep it simple.


I buy a security for $1.  The loss severity means I stand to lose 57 cents of that dollar.

However, I can buy the security not for a dollar, but for 34 cents. 

How is this worhtless?  This is a carry monster.  Inflation helps it.  And deflation?  Well, its pretty deflated right now.


Rynak's picture

But inflation is just stealth-taxing......... and it we were really evil, we could argue that all accumulated debt, may as well be expressed with future inflation.

So, what does that mean, if at some point in the future, we want to neutralize those insane debt levels?

Well, if we inflate it away, we basically simply tax everyone linear to their wealth. The question open is how other prices react, especially wages. The more wages increase, the more we bias this giant reset towards corporations. The less wages increase, the more we bias it towards workers. Considering current levels of unemployment, can workers take significantly more burden at all, or would it just either be compensated by taxes (and thus biased towards employers) or result in millions dying?

And i may add: the longer the can is kicked down the road, the more bloody this will be.

Which brings me back to my previous post: Obviously, a lot of people will be pissed. What i as a plutocratic asshole am betting on, is that i cheated by converting everything to non-inflatable inflation-resistant hard assets, and that the masses will not find and lynch me.... or in other words: That i can rob everyone, leave scorched earth behind, and escape consequences. And i haven't even brought war into the picture yet.

P.S.: In the big picture, it's nothing more than plain wealth distribution. By cheating the system, i according to the game rules have more claim to wealth, by robbing it from others - and i do hope that the rules are at least someway kept up, so that i keep what i did steal.

jm's picture

With all due respect, you are thinking too linearly about the inflation eating away at dollars effect.  The effect is quite differetn for these securities.

Inflation helps these securities because it makes the terms more affordable over time.  So the loss severity is less than you discounted and you get price appreciation and better yield than you expected. 

We had 3-4% inflation for years before this and no one pissed their pants like they are now.  I'm certainly not saying I want inflation or that it isn't coming, but hyperinflation is so overblown at thi spoint it is a joke.  Anyway, the Weimar winners got steady income in pound-denominated bonds as the mark imploded. 

Rynak's picture

How does it make them more affordable (and profitable), if the yields as well inflate away?

jm's picture

Say you have inflation of 5% and you get a yield of 9% = figure the real return here.

Say you have inflation of 7% and the losses are less (asset performance is better) and you yield 13% instead = figure the real return here.


Rynak's picture

IF that is the case, AND inflation does not increase (which it should if everything is fixed by just more debt/money printing), THEN yes.

P.S.: The point here is, that debt/money printing cannot just go higher forever. Once the yields go high enough, inflation/debt will automatically have to neutralize the higher yields, quite simply because the gov can no longer afford those yields, and thus they're fake!

jm's picture

I could be wrong just like anybody. 

If inflation goes ballistic like the groupthink screams, I'll be a loser that thought he was buying cheap.

If, on the other hand, inflation doesn't, then at least I'll have some income.

Everybody needs to get out of the groupthink.

Rynak's picture

Well, of course! Of course lending to a gov, that has responsible and sustainable financials, is profitable - BECAUSE HE CAN PAY BACK WHAT HE PROMISED YOU. In the kleptocratic scenario however, the gov can never actually pay back what it promises, unless the population is some magical money shitting wonder, that generates incredible tax revenues, which are NOT beyond budget balance stolen by the kleptocracy.

But once you have a parasitary system, where the net national budget balance is negative, the yields must be fake, by being offset someway. Someone who cannot afford paying interest, simply cannot pay the promised interest.

jm's picture

That read like a commercial message from the "Partnership for Hopeless Fringe Theories of Doom."

Rynak's picture

When you have no arguments left, resort to rethorics. End of discussion and waste of time.

Go back to claiming to lend to a gov, that runs a budget deficit of over a trillion, while you do the opposite. Maybe you will find some suckers. It sure as hell won't be the majority of current investors, who are not part of a bank.

jm's picture

I actually thought it was pretty damn funny. 

But then again for me, it is a financial discussion.  For most on here anymore, it seems to reduce to:

  • griping about political bullshit
  • inaction in the face of the nameless
  • snuggling up to some gloom and doom

all of which help no one and no thing.


Rynak's picture

Oh, it certainly helps people not throwing capital into the black hole, that is united states finances. Anyone argueing for lending to someone who quite simply cannot pay back, and shows no signs of intending to change anything about that, is either braindead, or is argueing for cash. Have a nice day.

jm's picture

Back to square one.  Loan's already been made.  I'm buying it secondary for pennies on the dollar.

<insert do loop>

Rynak's picture

Doesn't change anything. If the state would *constantly* *now* monetize the debt, AND prices would fully relect that inflation, you would simply get the bond exactly as much cheaper, as your losses would be decreased. All you're betting on is "it won't happen, before i've sold it again or the yield is paid". You're simply trying to be quicker and more clever than a steamroller right behind you.

If one also likes to daytrade in HFT-infested stocks, i guess that is no increased risk - perhaps even a lower one. But then again, almost no common person trades stocks anymore, for a reason. It has to do with lack of suicidal tendencies.

RockyRacoon's picture





HEY!  Get a room.

fxrxexexdxoxmx's picture

JM- Thanks for the info.

knukles's picture

In cases such as this, investment banking services are not meant to fix anything at all, whatsoever.  They are made available at top dollar to the highest bidder, that he may then provide the absolute best optical demonstration of absolutely nothing, at the highest cost, for the greatest impact, in the shortest period of time, raising the least questions of which there shall be none asked which make any sense, since to ask anything merely proves suspicions as to the questioner's ignorance, for the only passable observation is the classic, bullshit.
And they say I never learnt anything.